Barclays A Guide To MBS Reports

A Guide to MBS Reports
September 17, 2007 INTRODUCTION
Prasanth Subramanian The daily pricing reports and monthly issuance and prepayment reports on LehmanLive
212-526-8311 were changed last year. There were changes made to the content of the reports and the
psubrama@lehman.com way they are accessed. In addition to these changes, we also added a few new reports to
the website. This article attempts to serve as a manual for all the analytics reports and
Eric Wang
212-526-8311 tools on LehmanLive.
erwang@lehman.com
Olga Gorodetsky
ACCESSING EXCEL VERSIONS OF THE REPORTS
212-526-8311
Most analytics reports are now available in three formats and can be accessed as follows.
ogorodet@lehman.com
• The standard PDF version, accessed by clicking on the name of the report.
• The HTML version, opened by clicking on the caret icon next to the name of the
report (Figure1, step 1), which also leads to the third version (Figure 1, step 2).
• The Excel version is available on the upper right corner of the HTML version.
Let us take the Fixed Rate TBA Report as an example. The first step to pull up the HTML
version is to click the caret icon next to the report. This opens up the HTML version of the
report with an excel icon on the top right. Clicking the excel icon opens up the report in
excel.
Figure 1. Downloading Data into Excel
Step 1. Click on “Caret” Next to Fixed Rate TBA Report Step 2. Report Opens with Excel Icon
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 39
Lehman Brothers | A Manual to MBS Reports
REPORTS
In this section, we shall describe each of these reports in detail. In the interest of brevity
we will not explain every field, but rather concentrate on areas that require clarification
(e.g., which curve we use to compute option-adjusted spreads (OAS)). The following is
the list of reports, clicking on any of these links will open up the corresponding section
of the manual.
1. Passthrough Summary
2. Fixed Rate TBA Report
3. Seasoned Passthrough OAS Report
4. Passthrough Partial Duration Report
5. Empirical Duration Report
6. Forward TBA Report
7. Roll Analysis Report
8. Hedge Adjusted Carry Report
9. Price Change Attribution Report
10. Strip OAS Report
11. Strips Price Attribution Report
12. Strips Breakeven Analysis Report
13. Strips Risk Report
14. Strip Prepayment Report
15. MBS Index Summary Report
16. MBS Strategy Report
17. Agency Specified Pool Prepayments Report
18. Issuance Reports
19. MBS Collateral Availability Report
20. Prepayment Performance Inspector
21. Performance Calculator
September 17, 2007 2

Figure 2. Pass Through Summary Report
Note: All values in Par Coupon Summary are averages of FNMA and FHLMC values.
Source: LehmanLive
PASSTHROUGH SUMMARY
Purpose of the Report

This report summarizes the activity in passthroughs and other sectors that affect
passthrough pricing. The top portion of this report gives a snapshot of five key market
segments: 30-YR FNMA, 30YR FHLMC, 30-YR GNMA, 15-YR FNMA and 15-YR
FHLMC. The rest of the report summarizes the price action in other fixed income
markets that have a bearing on passthrough prices.
Explanation of Columns
Treasury Curve/LIBOR Curve We use two benchmark curves for mortgage valuation: the treasury curve and the LIBOR
curve. The Lehman Brothers’ treasury curve is built with off-the-run treasuries. The
default curve against which our analytics are calculated is this off-the-run spline.
Option Adjusted Analysis Lehman Brothers’ Option Adjusted analysis relies on a mean-reverting two-state Monte
Carlo Simulation model to generate interest rate paths. These rate paths are passed to the
prepayment model to generate cash flows, which are discounted path by path, then
averaged to reach a theoretical price.

OAS OAS is the option-adjusted spread to the Treasury curve. We use 500 Monte Carlo paths
to value the optionality in passthroughs. The OAS is the spread to Treasuries on all these
paths that equates the average price of the mortgage to the actual market price.
LOAS Option-adjusted spread over the LIBOR curve.
On-The-Run Treasury (OTR) The most recently issued U.S. Treasury bonds or notes. They tend to trade richer than the
off-the-run treasury curve due to superior liquidity.
OAD Similar to Modified Duration, Option-Adjusted Duration measures the rate of change in
price corresponding to a small parallel shift in rates. OAD is calculated by generating the
rate paths as described in Option Adjusted Analysis. Then, we shift the rate paths up and
down by 25 bp, and pass the new rate paths to the prepayment model to generate cash
flows. These cash flows are discounted with the shifted curves to obtain a Price(-∆y) and
Price(+∆y). OAD is computed by the following formula:
P(− Δy ) − P(+ Δy )
OAD = * 100 ∆y is in percent and 100 is a scaling factor.
2 * Δy * P
30-Year Par Coupon Summary

OAS vs 10NC3 OAS of the passthrough subtracted by OAS of the 10-Year Agency benchmark not
callable for three years.
ZV Zero volatility OAS is the spread to the forward curve. Option-Adjusted Analysis is
performed using the forward curve as the only rate path. This is basically the spread that,
when used to discount expected forward cashflows, gets us to today’s market price. The
difference between ZV and OAS is the cost of prepayment option.
MTG. RATE This is the secondary mortgage rate. It is determined by interpolating near par TBA
passthroughs prices to reach a par coupon yield, then adding a 50 bp spread. Since the
rate paid by borrowers, also called the primary mortgage rate, is not known on a daily
basis, the secondary mortgage rate is used as a proxy. This is the driving rate for
prepayments in the Lehman Brothers prepayment model.
Implied Volatility Summary

BP Vol The basis point (BP) volatility of yield changes is defined as the annualized standard
deviation of the absolute change 1 in yield.
Black Vol(%) This is the annualized standard deviation of the percentage change in yield. The implied
Black volatility is the parameter σBlack that solves the pricing equation
PMarket = PBlack(σBlack)
Where PMarket is the market price and PBlack(σBlack) is the appropriate Black equation for
the option. The Black model assumes that Black Volatility is constant. Vega numbers on
subsequent reports correspond to Black Volatility.
LBOX The Lehman Brothers Volatility Index
1
Do not confuse “absolute change” with absolute value. It is only in contrast with “percentage change”.

FIXED RATE TBA REPORT
Figure 3. Fixed Rate TBA Report
Source: LehmanLive

This report provides detailed analytics on the major TBA Passthrough segments.
I-Spread at Bberg Med. PSA Spread to the interpolated Treasury curve based on the Bloomberg median prepayment
speed.
OAS, OAD, ZV See Passthrough Summary Report.
OAC Option Adjusted Convexity, computed with the same procedure used for OAD, by the
following formula
P(− Δy ) + P(+ Δy ) − 2 P
OAC = * 100 ∆y is in percent and 100 is a scaling factor
P * (Δy ) 2
What Convexity Means for MBS Investors
Convexity is the second derivative of the price-yield function. It is positive for

conventional bonds and is negative for mortgage passthroughs. Negative convexity
dampens the price appreciation if interest rates fall and aggravates the price decline if
interest rates rise. For example, even though Passthroughs usually have higher yields
than Treasuries, they may underperform Treasuries if rates move from the base case due
to the inherent negative convexity.
OAS val 32nd (bps) This measures how much the OAS moves per 1/32nd move in price, all else being equal.
This is essentially the reciprocal of the spread duration of the mortgage. It gives an
estimate of what spread move to expect for every 1/32nd move in price.
Vega (32nd) Price change of the security in ticks per 1% change in Black yield volatility. The price
change assumes that 30-year mortgage rates increase by 6 bp, and 15-year mortgage rates
increase by 4 bp for a 1% increase in volatility. Since passthrough prices decline when
volatility increases, these values are negative.
OA HR Option-adjusted hedge ratio. The amount of 10-Year U.S. Treasuries (UST) required to
delta hedge each unit of passthrough.

Excess Returns vs. Treasury Total return of the TBA-like vintage from the MBS index over a key rate-matched mix of
treasuries. This is expressed in basis points and is a metric calculated as part of the
returns of the Lehman Brothers MBS Index. This assumes monthly duration rebalancing.
Constant Vol vs. LIBOR OAS This is the OAS calculated by holding the volatility surface (normal volatility) to be the
(CVOAS) same as in late December 1999. The move in this spread is an indication of the nominal
performance of mortgages without taking changes in volatility into account. The
difference between LOAS changes and CVOAS changes on a daily basis is the effect of
changes in implied volatility on passthrough prices.
Empirical Duration The rate of change in market price corresponding to a small change in benchmark yield,
measured over a given historical period. There are many ways to estimate empirical
duration. One way is to use a series of consecutive observations of percentage changes in
the MBS price and changes in the on-the-run UST 10-year yield, ending with the
observation on day t-1. One can regress percentage MBS price change against yield
change to get
Retactual, t = α + βt-1 x ∆Ybenchmark, t + εt
Unfortunately this approach does not work well when mortgage rates bounce around and
cause the duration of a bond to change. We use an alternative method:
Let Rmtg, today ≡ Prevailing mortgage rate (secondary mortgage rate – 50 bp) at day t.
K ≡ Rmtg, today – Coupon of Bond
Pmtg, t ≡ Price of a synthetic instrument at time t, linearly interpolated between the two
coupons straddling Rmtg, t – K
∆Pt ≡ Pmtg, t – Pmtg, t-1
Retactual, t = α + ED x ∆Ybenchmark, t + εt
The benefit of this approach is that the security’s coupon is always the same offset from
the prevailing mortgage rate, i.e., the security has constant relative coupon.

SEASONED PASSTHROUGH OAS REPORT
Figure 4. Seasoned Passthrough OAS
Source: LehmanLive
Float Net of CMO ($B) Amount outstanding in the vintage not in CMOs.
SATO Spread at origination. It represents the number of standard deviations by which the WAC
on a pool differs from the average pool that was originated in the same month. It
measures the borrower’s creditworthiness at origination. High SATO pools have, in
general, better convexity than lower SATO pools. For example, prepayments on higher
SATO pools pick up more slowly than low SATO pools when in the money.
Price/Payup TBA price or the amount over the TBA price of the seasoned passthroughs.
Even OAS Payup Price premium (in 32nds) the seasoned passthrough would command over the TBA if
both bonds were trading at the same OAS.
% of Even OAS Market payup divided by Even OAS Payup, expressed in percentage terms.
1m B/E Roll (32nd) This is the 1-month carry on the vintage assuming funding at LIBOR and Lehman
prepayment model projections for prepayments.
-15 PSA This represents the price change in ticks for a 15% PSA decline in prepayments, holding
OAS constant. For discount coupons, the reduction in prepayment speed extends duration
and reduces present value; therefore this number is negative. The impact on premium
coupons is positive if the coupon is deep in the money. This metric is a measure of the
extension risk in the mortgage.
-10 Elbow The elbow, also known as the refinancing threshold, is the point on the prepayment S-
Curve where the rate of slope increase is highest. The -10 Refi Elbow represents the
price change in ticks for a 10 bp decline in this threshold, or a 10 bp increase in refinance
incentive. A decrease in the elbow essentially pushes the mortgage deeper in the money.
This metric is a measure of the call risk in the mortgage.
1-yr CPR (%) The projected average CPR for the next year.
LT CPR (%) Long-term prepayment projections use the weighted average life equivalent method. LT
CPR is the single rate that makes the passthrough’s average life the same as implied by
the monthly projections made by the Lehman Brothers prepayment model.
Forecast error 6 mth Forecast – actual prepayments over the last six months, annualized.

PASSTHROUGH PARTIAL DURATION REPORT
Figure 6. Passthrough Partial Duration Report
Source: LehmanLive

Partial Durations, also known as Key Rate Durations (KRD), address the problem of
non-parallel movements in yields by allowing the investor to measure MBS price
sensitivity to six particular par Treasury rates. For example, a 5-year KRD of 1.56
indicates that the bond prices changes 1.56% for each 1% change in the 5-year par
Treasury rate.
Recall that OAD is calculated by shifting the entire curve up and down. Each KRD is
computed by shifting the key rate up and down 5 bp and shifting the part of the spline
curve between the adjoining key rate points in a “hat”-shaped pattern.

EMPIRICAL DURATION REPORT
Figure 7. Empirical Duration Report
Source: LehmanLive

Empirical duration measures the percentage change in market price of a passthrough
given 1% change in benchmark yield. See Fixed Rate TBA Report section for details of
our choice of empirical duration. When compared with model-based OAD, empirical
durations can give useful information on how the market interprets interest rate risk.
For example, the 7.00 coupon has empirical durations in a range between 1.45 and 1.76
versus various benchmarks, but the OAD is 3.09. The market expects a far shorter bond
than OAD would suggest because the model is backward looking: it has based
prepayment projections on the seasoned 2002 vintage 2. At the time of this writing,
mortgage rates are rising and new 7s are being produced. They are expected to prepay
much faster than the 2002 vintage.
Empirical Duration (ED) The rate of change in market price corresponding to a small change in benchmark yield,
measured over a given historical period. There are many ways to calculate empirical
duration. Our method uses a synthetic instrument that always has the same relative
coupon as the passthrough on the day of the report.
Let Rmtg, today ≡ Prevailing mortgage rate (secondary mortgage rate – 50 bp) at day t.
K ≡ Rmtg, today – Coupon of Bond
Pmtg, t ≡ Price of a synthetic instrument at time t, linearly interpolated between the two
coupons straddling Rmtg, t – K
∆Pt ≡ Pmtg, t – Pmtg, t-1
Retactual, t = α + ED x ∆Ybenchmark, t + εt
The benefit of this approach is that the security’s coupon is always the same offset from
the prevailing mortgage rate, i.e. the security has constant relative coupon.
2
2002 was the last time GNMA 7s were produced until recently.

FORWARD TBA REPORT
Figure 8. Forward TBA Report
Source: LehmanLive

This report shows the current and forward prices of TBA passthroughs. The report also
gives the forward OAS structure of passthroughs.
nd
1 Month Forward: Drop (32 ) The price drop from current settle to one-month forward settle. Typically, investors
selling a TBA passthrough today and buying it back one month later are able to reinvest
the proceeds at a lower rate than MBS rates and want to be compensated for the negative
carry.
2 Month Forward: Drop (32nd) The price drop from one-month forward settle to two-month forward settle.
ZV, OAS, LZV, LOAS etc. Refer to the Pass Through Summary report for definitions of ZV, OAS, LZV, LOAS, and
to the Fixed Rate TBA report for the definition of LOAC. Careful readers may notice
that LOAS widens from month to month. This is not simply due to lower forward prices.
Holding LOAS constant and moving settlement forward, the price of the TBA
passthrough will decline from month to month due to negative carry. LOAS widening
suggests that price drops exceed the effects of positive carry. Part of the widening can be
attributed to the fact that current TBA pools are used in calculations in forward time,
when they are more seasoned and less negatively convex. Their LOAS will be higher
than future TBA pools at the same price. The other reason for a gradual widening of
LOAS is due to specialness of mortgage financing. Essentially the roll markets are
financing mortgages at levels better than the LIBOR curve.

ROLL ANALYSIS REPORT
Figure 9. Roll Analysis Report
Source: LehmanLive

A dollar roll is similar to a repurchase agreement: An investor engaging in the dollar roll
sells and repurchases a passthrough security on different settlement dates. This report
helps the investor assess the cost and benefit of a roll.
Roll (32nd) This is trader-marked price drop between current month and next. The reason for the
price drop is because the investor in the roll can typically reinvest the proceeds at a lower
rate than MBS rates and wants to be compensated for the negative carry.
Break Even Carry (32nd) This is the breakeven price drop on the roll assuming financing at one-month LIBOR and
prepayments based on Lehman Brothers’ model. When the Roll is higher than the Break-
Even Carry, it suggests engaging in the Roll is more attractive than continuing to hold
the MBS.
B/E CPR This is the CPR at which the carry on the mortgage equals its drop assuming financing at
one-month LIBOR. For a discount coupon MBS, when the projected CPR is lower than
the B/E CPR, it suggests engaging in the roll. This is because lower CPR hurts the price
of a discount MBS.
B/E Funding Rate The B/E Funding Rate is the financing rate at which the carry on the mortgage equals its
drop assuming prepayments are as projected. If the investor can reinvest at a rate higher
than the B/E rate, he would want to engage in the roll.
Specialness Level 32nds This is the difference between the Roll and the breakeven carry in price space. The
higher the level, the more in demand the MBS is.
Specialness Funding (bps) This is the difference between the breakeven funding rate and one-month LIBOR. The
lower the funding, the more in demand the MBS is.
Specialness in OAS This is the difference between the current month OAS on the TBA mortgage and the
Forward month OAS. The higher the difference is, the more special the roll.
Sensitivity of Rolls (32nd) This shows how much the roll would change if the B/E funding rate were to go up by
10bpHigher Financing Rate 10 bp.
Sensitivity of Rolls (32nd) 5% This shows how much the roll would change if prepayments were to increase by 5% CPR
higher CPR at the B/E funding rate. For a discount coupon MBS, higher CPR implies a higher price
and, therefore, a higher roll, ceteris paribus.

HEDGE-ADJUSTED CARRY REPORT
Figure 10. Hedge-Adjusted Carry Report
Source: LehmanLive

Passthroughs usually offer better yield than competing instruments but also have
embedded risks other instruments do not have. This report breaks the yield advantage
into parts that compensate for identifiable risks: duration, convexity (gamma), and vega.
It allows investors to compare passthroughs with other fixed-income investments on a
risk-adjusted basis.
All numbers are in 32nds.
Duration Hedge The monthly cost of hedging duration exposure with a basket of 2-year and 10-year
swaps weighted by model key rate durations. This is the coupon less one-month LIBOR
on the basket of swaps.
Net Carry The dollar roll of the mortgage subtracted by the carry lost due to the duration hedge.
Vol Hedged Short Dated The cost of hedging convexity and vega exposure with a basket of short-dated and long-
Option, Long Dated Option dated swaption straddles. For short-dated swaptions, 3-month x 10-year straddles are
used. The choice of long-dated swaptions depends on the passthrough’s dollar price. We
use 2-year x 5-year swaptions for bonds priced above 102, 3-year x 10-year for bonds
priced from 98 to 102, and 5-year x 10-year for bonds priced below 98. We calculate
what combination of this short and long swaption will result in a package that mimics the
gamma and vega of the passthrough. There are two unknowns (the two hedge ratios) and
two equations (gamma and vega neutral). Once the hedge ratios are known, the carry lost
in each option is just its one-month theta decay.
Vol hedged Net Carry (Roll – Duration Hedge – Vol Hedged Short Dated Option – Long Dated Option)

PRICE CHANGE ATTRIBUTION REPORT
Figure 11. Price Change Attribution Report
Source: LehmanLive

This report attributes changes in prices to various inputs captured by the Lehman
Brothers Prepayment Model. This is useful to track the reasons for the
richening/widening of the sector. The price change attribution is shown for a one-day
period as well as for a five business day period.
The price of a security is a function of the curve, the implied volatility surface, the
trading date, the settlement date, mortgage spreads, and the OAS. 3
Figure 12. Pricing a Mortgage Security Through the Lehman Brothers Model
Trade Date – T1
and Settlmt –S1
Volatility – V1 Current Coupon
Spreads – S1
Lehman OAS
Model
Swaps Curve – C1 OAS of Security –

O1
Price of the
Security = P1
Source: Lehman Brothers
3
Mortgage Spreads can be understood as the spread between secondary mortgage rates and swaps.

Flow Chart of Price Attribution
The flow chart shown above in Figure 12 helps one understand the price attribution
algorithm better. The steps in the attribution start with today’s price (final price) and
change the inputs to the model incrementally to get to the initial price. All intermediate
prices in this process help explain a component of price changes.
Price Price of the security today, known as the final price.
Due to Curve Price the security with yesterday’s curve but all other inputs are the same as today, call
this P1. Price change due to curve = (Final – P1)
Due to Implied Volatility Price the security with yesterday’s curve, yesterday’s volatility surface but all other
inputs are the same as today, call this P2. Price change due to volatility = (P1 – P2)
Due to Carry Price the security with yesterday’s curve and yesterday’s volatility surface, change the
trade date and settlement date to yesterday. All other inputs are the same as today. Call
this P3. Price change due to carry = (P3 – P2)
Due to Mortgage Spreads Price the security with yesterday’s curve, yesterday’s volatility surface, yesterday’s trade
and settlement date, and change current coupon mortgage rates to match yesterday’s
rates. Call this P4. Price change due to mortgage spreads = (P4 – P3)
Due to OAS Price the security with yesterday’s curve, yesterday’s volatility surface, yesterday’s trade
and settlement date, yesterday’s current coupon, yesterday’s OAS. Call this P5. Price
change due to OAS = (P5 – P4)
P5 should be equal to the initial price, and any difference shows up as unexplained.

STRIP OAS REPORT
Figure 13. Strip OAS Report
Source: LehmanLive

This report displays useful analytics for Trust IO/POs (interest-only/principal-only
mortgage derivatives). These mortgage derivatives are highly sensitive to changes in
interest rates and mortgage prepayments. This makes them very useful for portfolio
hedging purposes. For example, IOs are a good tool for banks that need to hedge their
fixed-rate mortgage portfolios against rising interest rates. Hedge funds use IOs to
express a bearish view on interest rates and earn positive carry at the same time. POs are
useful for mortgage servicers, who often hedge their IO exposure by buying POs and
selling MBS.
TBA Sprd The combined price of the IO and PO subtracted by the TBA price in 32nds, a.k.a.
combo spread. Typically, the combined price is greater than the price of the underlying
collateral, which typically has a payup over the TBA because one can combine the IO
and PO and replicate the cashflows of the underlying MBS, but not vice versa.
B/E Mult (%) The Breakeven multiple is the model breakeven multiple. It is the percentage of the
Lehman prepayment model projection at which the IO and PO trade at the same LOAS.
It can be interpreted in two ways:
• Assuming the prepayment model is perfect, it measures the relative
richness/cheapness between the IO and the PO. If it is less than 100%, IOs are more
expensive than POs.
• Assuming IOs and POs should trade at even LOAS, it measures how far the
prepayment model prediction deviates from market expectation. If B/E Mult is less
than 100%, the market expects prepayment will be slower than model predictions.
IO OAS Analysis vs. LIBOR See the Passthrough Summary Report for the definitions of ZV, OAS, and OAD and the
Fixed Rate TBA report for the definition of OAC. IO prices increase as rates increase;

hence their OADs are negative. IOs have negative convexity due to the embedded
prepayment option. This is similar to passthroughs, except the magnitude is more
pronounced in IOs.
IO Prepayment Analysis (32nd) This is the price change in ticks for a 15% PSA decline in prepayments holding OAS
IO -15 PSA constant. For IOs, interest payments increase as prepayments slow. Therefore, this
number is positive.
IO -10 Elbow The elbow is the point on the prepayment S-Curve where the rate of slope increase is
highest. The -10 Refi Elbow represents the price change in ticks for a 10 bp decline in
this threshold, or a 10 bp increase in refinance incentive. For IOs, interest payments
decrease as prepayments slow. Therefore, this number is negative.
PO OAS Analysis vs. LIBOR See the Passthrough Summary Report for the definitions of ZV, OAS, and OAD and the
Fixed Rate TBA report for the definition of OAC. Higher interest rates imply slower
prepayments and steeper discount rates on future cash flows of a PO. Therefore, a PO has
positive OAD. A PO also has positive OAC because it is long a call and short a put but
the call dominates.
PO -15 PSA For POs, cash flows are discounted at higher rates as prepayment slows. Therefore, this
number is negative.
PO -10 Elbow Cash flows are discounted at lower rates as prepayment increases. Therefore, this number
is positive for POs.
PVbp (32nd) The change in the price of the security, measured in 32nds, for a 1 bp tightening in its
OAS.
OA H.R. Option-adjusted hedge ratio is the amount of 10-Year UST required to delta hedge each
unit of the security. For an IO, the ratio is negative because it has negative duration (i.e.,
one needs to buy duration to hedge a long IO position). OA H.R. is positive for POs.

STRIPS PRICE ATTRIBUTION REPORT
Figure 14. Strips Price Attribution Report
Source: LehmanLive

Similar to the Passthrough Price Attribution report, this report attributes changes in
IO/PO prices to various inputs captured by the Lehman Prepayment Model. This is
useful to track the reasons for the richening/cheapening of the Strips sector.

STRIPS BREAKEVEN ANALYSIS REPORT
Figure 16. Strips Breakeven Analysis Report
Source: LehmanLive

This report analyzes IO/PO pairs under certain valuation assumptions. The metrics
shown help the investor evaluate the relative richness/cheapness of IOs and POs.
“Same OAS” Analysis Analytics under this heading assume the IO and PO trade at the same LOAS by adjusting
prepayment projections.
OAS The Option-Adjusted Spread of the IO and PO with the same prepayment projection.
% of Model This is the percentage of the Lehman Brothers Prepayment Model prediction at which the
IO and PO trade at the same LOAS. See Break Even Multiple in the Mortgage Strips
OAS report for details.
Yeq PSA The Yield Equivalent PSA is the prepayment speed at which the IO and PO have the
same yield.
PO/IO OAD, OAC The option-adjusted duration and convexity of the IO and PO given the prepayment
projection that make the OAS of the IO and PO equal. These risk numbers, not the
prepayment model–based OAD and OAC, are used for hedging by IO market
participants.
“Same Yield” Analysis Analytics under this heading assume the IO and PO trade at the same yield.
CPR The constant prepayment speed at which the IO and PO have the same yield.
Yld The yield implied by the aforementioned CPR.
A/L The average life of the PO implied by the aforementioned CPR.
Zero IO Yld The constant prepayment speed at which the sum of the IO’s cash flows equals its price
(i.e., the IO has zero yield).

STRIPS RISK REPORT
Figure 17. Strips Risk Report
Source: LehmanLive

This report shows detailed risk numbers on IOs and POs. These are based on the Lehman
Brothers Prepayment Model.
IO Key Rate Duration See the Partial Duration report for a detailed explanation on Key Rate Duration (KRD).
IOs are implicit curve steepeners. This is shown by their positive 6-month and 2-year
KRDs and negative KRDs on 10-year, 20-year, and 30-year.
Vega (32nd) Price change of the security in ticks per 1% change in Black yield volatility. The price
change assumes that current coupon mortgage rates increase by 6 bp for a 1% increase in
volatility. The effect of Vega on IOs is twofold. Everything else unchanged, an increase
in implied volatility hurts IOs since the IO holder is short options to the homeowners.
However, the increase in implied volatility raises the option cost on passthroughs and
increases mortgage rates. This increase benefits IOs and hurts POs. The second effect
usually dominates except in deep discount IOs. Hence, IOs generally have positive vega
and POs negative vega.
Mortgage Spread Duration Mortgage Spread Duration shows the sensitivity of the security to a 10 bp change in
current coupon mortgage spreads. When mortgage spreads tighten all mortgage securities
become more callable. This leads to decreases in IO prices and increases in PO prices.
Therefore, IOs have negative Mortgage Spread Durations and POs have positive
Mortgage Spread durations.

STRIP PREPAYMENT REPORT
Figure 18. Strip Prepayment Report
Source: LehmanLive

This report displays prepayment history, short-term prepayment projections, and longer-
term forecasts under different interest rate scenarios.
1-yr CPR (%) The projected average constant prepayment rate (CPR) for the next year under various
rate environments.
LT CPR (%) Long-term (LT) prepayment projections use the weighted average life equivalent
method. LT CPR is the single rate that makes the passthrough’s average life the same as
projected by the Lehman Brothers Prepayment Model.

MBS INDEX SUMMARY REPORT
Figure 19. MBS Index Summary Report
Source: LehmanLive

This report breaks down the Lehman Brothers MBS Index outstanding amount and return
by sector, ticker, coupon, and WALA.
Returns are reported on two groups of securities. The “Returns Universe” includes
securities in the index this month. The “Statistics Universe” is a dynamic index that
changes based on securities dropping in and out of the index. The statistics index at the
end of the month becomes the returns index for the next month. The difference between
the statistics universe and the returns universe durations is the duration extension
expected at the end of the month.

MBS STRATEGY REPORT
Figure 20. MBS Strategy Report
Source: LehmanLive

The “Coupon Swap Basis – Rich/Cheap Analysis” section of this report gives a statistical
analysis of some common coupon swap and butterfly trades.
Hedge Ratio OAD Hedge Ratio computed based on OAD. For butterflies, the ratios are both duration and
proceeds neutral. The first ratio refers to the lower coupon of the fly.
Price PSA Actual market quoted price. For FN 5.0 butterfly,
Price = 2 x Price(FN 5.0) – Price(FN4.5) – Price(FN 5.5)
Price Adjusted We use market dollar rolls to calculate a constant 30-day forward settle price. Since
market prices tend to rise as we approach the notification date, this adjusted price gives a
fair comparison from day to day. The rest of the analytics are based on adjusted price.
30d 30-day average adjusted price. This is based on a regression of the adjusted prices vs.
mortgage rates. The average price is the expected price from this regression for current
mortgage rates.
30d Z-score Number of standard deviations the current price deviates from the 30-day average.
LOAS LOAS is the OAS pickup in entering the trade. For example, as shown in the report,
buying FN 5s and selling a duration-neutral amount of 4.5s results in a position with -2
bp of OAS. The average OAS over the last 30 days was -1 bp.

AGENCY SPECIFIED POOL PREPAYMENTS REPORT
Figure 21. Agency Specified Pool Prepayments
Source: LehmanLive

This report allows clients to inspect historical prepayment speeds by several pool
characteristics: agency, type (vintage or WALA bucket), loan maturity, and stratification.
Clients can access this report in the Performance and Issuance Reports section of the
website. The report is available on a monthly basis for the past nine months. The user
needs to select the pool characteristics, report date, and hit the “Go” button before
downloading the report in Excel or PDF format.
Clients can choose one of the following stratifications other than “Aggregate”:
Size LLB, low loan balance, shows all pools with average loan size less than $85K.
MLB, medium loan balance, shows all pools with average loan size between $85K and
$110K.
HLB, high loan balance, shows all pools with average loan size between $110K and
$150K.
Other, other loan balances, shows all pools with average loan size greater than $150K.

FICO Low FICO is all pools with an original FICO less than 675
Medium FICO is all pools with an original FICO between 675 and 725
High FICO is all pools with an original FICO greater than 725
Other is pools for which FICO information is not available
LTV High LTV is all pools with an original LTV greater than 80
Average LTV is all pools with an original LTV less than 80
Occupancy Inv Prop is all pools where the owner-occupied percentage is less than 5%
Owner is all pools where the owner-occupied percentage is greater than 95%
Other is all pools where the owner-occupied percentage is between 5% and 95%.

ISSUANCE REPORTS
Accessing the Report
Figure 22. Getting to the report from Lehman Live
Click on “Issuance”
under “Performance
and Issuance Reports”
to bring up this page
Source: LehmanLive
Report Snapshot
Figure 23. Issuance Report
Source: LehmanLive

This suite of reports shows the net or gross issuance of agencies and non-agency entities.
There are three report types: Regular, Mega, and Summary. Regular and Mega break
down issuance by coupon, and Summary breaks down issuance by agency. Mega
contains only small pools re-securitized into large pools.
The section displayed in Figure 23 shows net issuance figures for FNMA Fixed Rate 30-
year collateral. Annual numbers are under the “Last 3 Years” heading. July month-to-
date net issuance figures are under the “Jul MTD” heading. Prior 12 months’ figures are
under the “2006” and “2005” headings.

MBS COLLATERAL AVAILABILITY REPORT
Figure 24. MBS Collateral Availability Report
Source: LehmanLive

This report shows how much MBS collateral is available and how fast it is expected to
prepay by WALA ranges. It can be found in the Performance and Issuance Reports
section.
The report has two sections for each unique agency, program, and coupon combination:
CPR and Float Available. Within each section, information is broken down by Total,
CMO, Total Net of CMOs, low loan balance pools, and Total Net of LLB pools. For
example, in Figure 24, the first section shows prepayment projections for FNMA Fixed
Rate 30-year 4.5% coupon pools and the second section shows the float available for the
same pools. Section one, row one shows the total float outstanding ($41.4 billion) and
float outstanding in each WALA range. Section two, row one shows the prepayment
speed for the pools in these WALA ranges.
TBA investors can use this report to project the availability and prepayment composition
of cheapest to deliver pools. For instance, FNMA 30-year 4.5% TBAs have 12 WALA.
This report indicates that there is $400 million of collateral net of LLB pools, and the
collateral is expected to prepay at 5.0 CPR.

PREPAYMENT PERFORMANCE INSPECTOR
Access the Inspector
Figure 25. Getting to the report on Lehman Live, Keyword: usmbsra
You can get to the

Prepayment
Performance
Inspector in more
than one way
Source: LehmanLive

Performance Inspector Snapshot
Figure 26. Prepayment Performance Inspector
Click here
Select one of five to
analysis types first download
(Time Series, chart data
Refinance Curves, to Excel
Seasoning Curves,
Orig. Loan Size, or Always hit
SATO), then pick “Go” after
collateral options changing
options
use the orange ↑↓

arrows to save the big
chart to, or load from,
one of 3 small
placeholder charts
below
Source: LehmanLive
Purpose of the Inspector

The Prepayment Inspector produces charts that display historical prepayment data,
measured in one-month CPR, as well as Lehman Brothers model predictions.
Chose an analysis first, then Like reports, one can download chart data to Excel by clicking on the icon on the upper
collateral options right-hand corner. One may also use the orange ↑↓ arrows to save the main chart to, or
load from, one of three placeholders below. Unlike a static report, the inspector is an
interactive tool. The user can choose different collateral and analysis options. Since
collateral choices depend on the type of analysis, choose an analysis options first before
picking collateral options.
Analysis Type
Always hit “Go” to generate a Currently, five analysis types are available: Time Series, Refinancing Curves, Seasoning
new chart. Curves, Original Loan Size, and SATO (Spread at Origination). When one chooses an
analysis type, relevant parameters will be displayed on the right. After the parameters are
set, hit “Go” to generate a new chart. The chart displays one-month CPR on the Y-axis
and a metric corresponding to the analysis type on the X-axis.
Time Series This analysis shows Factor Date on the X-axis. You can display Model Error, Mortgage
Rate, or Outstanding Balance on the right Y-axis.

Refinancing Curves This is the S-curve that shows how CPR changes based on Relative Coupon. Relative
Coupon is the WAC of the pool subtracted by the mortgage rate. The mortgage rate is a
model-weighted average of mortgage rates in the past three months.
Seasoning Curves This shows the prepayment rate of the pool by seasoning, measured in WALA. WALA is
the average number of months since the date of loan origination weighted by loan
balance.
Orig. Loan Size CPR by original loan size.
SATO CPR by Spread at Origination, the number of stand deviations the WAC of the pool is
from the average WAC of all pools originated in the same month.

PERFORMANCE CALCULATOR
Access the Calculator
Figure 27. Getting to the calculator on LehmanLive, keyword: usmbsra
Click on the
Performance
Calculator link
under “Featured
Analytics” Source: LehmanLive
This interactive tool allows you to examine the historical performance of three types of
trades: Mortgage Basis, Coupon Swap, and Butterfly. Each has its own set of inputs and
charts.
Mortgage Basis
The Mortgage Basis trade is long a MBS and short a basket of benchmarks, duration-
hedged and rebalanced daily. Select the MBS, start and end dates of the trade, the
benchmarks to short and the hedge ratio. The charts plot the cumulative excess returns of
the trade. You can select two different sets of benchmark and hedge ratios and compare
them side by side.
Figure 28. Mortgage Basis
Click on the Excel

icon to download
daily Excess returns
of the trade.
Source: LehmanLive

Vs Swap or Treasury You can hedge the MBS with a 5-year or 10-year benchmark, or a combination of 2s and
10s, or the entire curve.
• w/ cash: This hedging method calculates returns such that the duration hedges ensure
market value and duration neutrality.
• w/o cash: In this method of hedging, the portfolio is only duration-neutral and the
market value of the long position is different from the short position.
• Curve: investor hedges with 6m, 2yr, 5yr, 10yr, 20yr, 30yr, using key rate durations
H/R One can choose a hedge ratio different from 1.0. There is also a choice of three
durations: 30d or 60d Empirical, or OAD.
Coupon Swap
This is simply long one coupon and short another, duration hedged and rebalanced daily.
Figure 29. Coupon Swap
Source: LehmanLive

Butterfly
A butterfly is long a coupon and short two nearby coupons (e.g., Long FNCL 6s, short
5.5s and 6.5s).
The calculator provides four ways to determine the amount of shorts:
Hedge with Cash Long 200 6s, short 100 5.5s and 6.5s. Make up the difference in cash.
OAD or 30d or 60d Empirical Buy 200 6s at the price of P6, sell X 5.5s and Y 6.5s so that
Duration
X*P5.5 + Y* P6.5 = 200*P6
X* P5.5*Dur5.5 + Y*P6.5*Dur6.5 = 200*P6*Dur6
Figure 30. Butterfly
Source: LehmanLive

Analyst Certification
The views expressed in this report accurately reflect the personal views of Prasanth Subramanian, Eric Wang and Olga
Gorodetsky, the primary analysts responsible for this report, about the subject securities or issuers referred to herein, and no
part of such analysts' compensation was, is or will be directly or indirectly related to the specific recommendations or views
expressed herein.
Important Disclosures
Lehman Brothers Inc. and/or an affiliate thereof (the "firm") regularly trades, generally deals as principal and generally provides
liquidity (as market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives
thereof). The firm's proprietary trading accounts may have either a long and / or short position in such securities and / or
derivative instruments, which may pose a conflict with the interests of investing customers.
Where permitted and subject to appropriate information barrier restrictions, the firm's fixed income research analysts regularly
interact with its trading desk personnel to determine current prices of fixed income securities.
The firm's fixed income research analyst(s) receive compensation based on various factors including, but not limited to, the
quality of their work, the overall performance of the firm (including the profitability of the investment banking department), the
profitability and revenues of the Fixed Income Division and the outstanding principal amount and trading value of, the profitability
of, and the potential interest of the firms investing clients in research with respect to, the asset class covered by the analyst.
Lehman Brothers generally does and seeks to do investment banking and other business with the companies discussed in its
research reports. As a result, investors should be aware that the firm may have a conflict of interest.
To the extent that any historical pricing information was obtained from Lehman Brothers trading desks, the firm makes no
representation that it is accurate or complete. All levels, prices and spreads are historical and do not represent current market
levels, prices or spreads, some or all of which may have changed since the publication of this document.
Lehman Brothers' global policy for managing conflicts of interest in connection with investment research is available at
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To obtain copies of fixed income research reports published by Lehman Brothers please contact Valerie Monchi
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A Guide to MBS Reports

September 17, 2007 INTRODUCTION

Figure 1. Downloading Data into Excel

September 17, 2007 2

Figure 2. Pass Through Summary Report

Purpose of the Report

September 17, 2007 3

30-Year Par Coupon Summary

Implied Volatility Summary

September 17, 2007 4

FIXED RATE TBA REPORT

Figure 3. Fixed Rate TBA Report

Purpose of the Report

Convexity is the second derivative of the price-yield function. It is positive for

September 17, 2007 5

September 17, 2007 6

SEASONED PASSTHROUGH OAS REPORT

Figure 4. Seasoned Passthrough OAS

September 17, 2007 7

PASSTHROUGH PARTIAL DURATION REPORT

Figure 6. Passthrough Partial Duration Report

Purpose of the Report

September 17, 2007 8

EMPIRICAL DURATION REPORT

Figure 7. Empirical Duration Report

Purpose of the Report

September 17, 2007 9

FORWARD TBA REPORT

Figure 8. Forward TBA Report

Purpose of the Report

September 17, 2007 10

ROLL ANALYSIS REPORT

Figure 9. Roll Analysis Report

Purpose of the Report

September 17, 2007 11

HEDGE-ADJUSTED CARRY REPORT

Figure 10. Hedge-Adjusted Carry Report

Purpose of the Report

September 17, 2007 12

PRICE CHANGE ATTRIBUTION REPORT

Figure 11. Price Change Attribution Report

Purpose of the Report

Swaps Curve – C1 OAS of Security –

September 17, 2007 13

Flow Chart of Price Attribution

September 17, 2007 14

STRIP OAS REPORT

Figure 13. Strip OAS Report

Purpose of the Report

September 17, 2007 15

September 17, 2007 16

STRIPS PRICE ATTRIBUTION REPORT

Figure 14. Strips Price Attribution Report

Purpose of the Report

September 17, 2007 17

STRIPS BREAKEVEN ANALYSIS REPORT

Figure 16. Strips Breakeven Analysis Report

Purpose of the Report

September 17, 2007 18

STRIPS RISK REPORT

Figure 17. Strips Risk Report

Purpose of the Report

September 17, 2007 19